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The bonus bites back: how to avoid getting eaten alive

Employee bonuses can offer value to employees and employers alike. Incentives, demonstrations of appreciation, as well as talent recruitment and retention are some of the reasons we see bonuses, and other forms of variable compensation, on the rise amongst employers.

Employees’ attitudes towards bonuses and their value on termination have generated a variety of legal issues. The key implications regarding issues arising from a bonus structure that is significantly changed or eliminated was recently considered by the B.C. Supreme Court in Piron v. Dominion Masonry Ltd. (Piron).

Piron involved a masonry foreman who had worked for his employer for 19 years. By 2005, he was receiving bonuses that were a “significant element” of his total compensation. The foreman negotiated for substantial bonuses for his work in the Woodward’s redevelopment project. He received a total of $140,000 in bonuses, $90,000 of which was paid in 2008 (essentially doubling his salary for that year) and $50,000 in 2009.

When the Woodward’s project ended in 2010, the employer assigned the foreman to work on two smaller projects. The parties discussed but could not agree on remuneration for these and future projects. The foreman did not receive any bonuses for his work in 2010 or for that part of 2011 that he was employed. The foreman subsequently claimed constructive dismissal on the basis that the employer had repudiated its previous system of paying bonuses based on his performance and the complexity of his work. The employer disputed the claim saying the bonuses were discretionary and there was no agreement regarding projects in 2010 and 2011. The employer also argued that there was no justification for bonuses in light of the economic downturn.

On the basis that bonuses became a significant part of the employee’s remuneration, the Court found that the foreman had the right to expect the parties to negotiate a bonus entitlement commensurate with an applicable project. The employer’s refusal to follow the negotiation process constituted a unilateral change that substantially altered his terms of employment and created a constructive dismissal. Although the Court noted that economic circumstances can lead to a substantial change to an employment contract, the Court noted that this kind of change ought to be negotiated and is not accomplished through the unilateral imposition of lower compensation.

Employers can learn at least three main lessons from Piron:

Be Clear in your Bonus Plan: The employer in Piron had no written bonus plan in place. The Court found that the basis for payment of the bonuses also never appeared to have any express parameters. Clarity is key to the success of any bonus plan for an employer, and the ideal plan will include provisions that clearly define the term of the plan (i.e. Is it fixed to a particular time period or project, or is it indefinite in nature?), the bonus criteria (i.e. What criteria must be achieved for a bonus to be payable, are there subjective and/or objective elements to the criteria, and, if there are subjective elements, who within the organization will determine if those elements are met, etc.), what form of compensation will the bonus take (i.e. Will the bonus be a cash award, a trip, a gift of some sort, time off, stock options, etc.), the date the bonus is payable, and what happens to any bonus entitlement upon termination of employment.

Use Your Discretion when Awarding Discretionary Bonuses: If your bonus plan is to be truly discretionary in nature, your plan should include an express provision to that effect, you should exercise that discretion, and continue to communicate its discretionary nature. Even if the plan is clearly framed as discretionary, if the employer’s practice is that employees always receive bonuses without any significant variation, a Court may not find that there was a real discretionary element to the bonus plan.

Reserve your Right to Change the Bonus Plan in Your Discretion: Employers often want considerable flexibility to change bonus plans to ensure that they are structured to meet the ever changing market conditions. The problem for the employer is that bonus plans are often a fundamental term of employment for employees, and, if the plan is not properly drafted, the employer may be obligated to provide reasonable notice of any material change that is adverse to the employee. Employers may be able to meet these challenges by ensuring both the plan and employment language are consistent in reserving the employer’s right to change the bonus plan in its discretion at any time.

Compare jurisdictions:Litigation: Enforcement of Foreign Judgments

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